Managing Credit and Debt

How can I improve my credit score?

Getting errors in your credit report fixed can give you the most immediate—and, potentially, significant—score boost. After you’ve done that, however, improvements in your rating will take time, and depend on you maintaining good habits. But if your rating is below 700, changes in behavior can be well worth the effort in terms of the price you’ll pay to borrow money.

The best thing you can do is to be vigilant about due dates. While it will take a while—about six months—to create enough of an on-time track record to significantly boost your rating, it’s the essential element of a top-notch score. So consider setting up bill alerts through your card’s website or even on your phone calendar. Dropped the ball on your Visa bill last month? Don’t panic – one or two late payments will merely nick, not sink, your score. Make sure to pay on time next month, though.

The amount you charge on each credit card vs. the amount of your credit limit makes up the so-called “utilization ratio” – the second largest element of your credit score. Lenders want to see that you don’t run up big balances, regardless of whether you pay them off in full every month. Look on your most recent statement to find out the max you can purchase on a given card, then limit your charges to 30% of that amount (10% is even better). Be aware that creditors will not only look at what you owe on each card relative to its limit, but what you owe in total relative to sum of your limits on all cards.

Trying to decide whether to put your extra cash towards your credit card or student loan debt? Chose the former. Losing a few thousand dollars’ worth of plastic debt might boost your score 100 points; axing ten times that amount of student loan debt will barely cause your score to budge.

The length of your credit history is the next biggest portion at 15% of your score. Unfortunately you can’t do much about this, but you can show banks that you can manage credit responsibly by charging things on your cards now and again (and paying them off promptly). Can’t qualify for a regular card? Start with a secured card, which is backed by the money in your bank account.

A small portion of your score is attributed to “new credit.” In this case, you’ll be punished for having too many new accounts, since that seems like a setup to risky behavior. Try to avoid applying for several credit cards in a short time, for example. (And store credit cards, by the way, take a bigger ding out of your score, so consider whether that 15% discount is worth what it will do to your mortgage prospects.)

The scoring formula also takes into account the mix of different types of credit you’ve handled—for example, do you have a home loan? Auto loan? Credit card? This one you can’t really do much about, unfortunately. You don’t really want to apply for a mortgage, if you’ve never had one, just for the sake of your credit score!

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